Rising Food Prices May Cause Consumer Indigestion

The Commerce Department reported on Thursday that consumers boosted their spending by a large 0.9% in March. Health-care demand related to the Affordable Care Act temporarily lifted service spending, but consumers also caught up on goods purchases postponed in the winter.

The March numbers mean consumer spending starts the second quarter at a high level. But after surviving the drag of winter, households must now confront the pressure of rising food prices.

A survey of U.S. consumers released Thursday by the Royal Bank of Canada show the vast majority of households have noticed the recent rise in food prices–from milk and meat to baked goods and kitchen staples.

Those sentiments are borne out by consumer prices tracked by the Labor Department. The price index for food bought to eat at home increased a large 0.5% in both February and March.

The RBC survey also found most consumers expect groceries to cost even more in the next six months.

That attitude looks correct, says RBC’s chief U.S. economist Tom Porcelli, given that raw food prices tracked by the Commodity Research Bureau are also on the rise. Over time, higher commodity costs will filter into grocery prices.

What’s important for the consumer outlook is how households are dealing with their higher grocery bills.

Some of those who have noticed the price increases are buying less of an item or substituting a cheaper alternative. But the vast majority are spending less on other goods and services to meet their food bills, or they are increasing their food budgets, leaving less money for saving.

The big exception is alcohol. RBC found 58% of consumers are adjusting to higher prices by buying less beer, wine and spirits.

Mr. Porcelli points out food eaten at home accounts for about 7% of total consumer spending, a small share compared to items like housing and health care. (Households spend another 5% or so on restaurant meals.) Consequently, higher food prices may not slow overall consumer spending growth in coming quarters.

“But the siphoning off [of money] to buy food may bust some discretionary consumer spending,” he says. Indeed, the RBC survey found consumers in general are hesitant about making a major purchase in May, “perhaps…driven in part by inflation pressures,” the report said.

Higher wages would allow consumers to scrimp less on other products in order to fill their grocery carts, says Mr. Porcelli.

The Commerce Department said personal income increased a solid 0.5% in March, helped by a 0.6% jump in wages and salaries. And Friday’s payrolls report will offer information on how hourly wages performed in April.

If household income gains starts to accelerate, consumers could be able to buy their cake–and eat it too.

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